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+314 Part Ill: Put Option Strategies 
+position. Another advantage of buying the protection initially is that one is protected 
+if the stock should experience a gap opening or a trading halt. Ifhe already owns the 
+protection, such stock price movement in the direction of the protection is of little 
+consequence. However, if he was planning to buy the protection as a follow-up 
+action, the sudden surge in the stock price may ruin his strategy. 
+The overall profit potential of this position is smaller than that of the normal 
+straddle write, since the premium paid for the long call will be lost if the stock is 
+below 50 at expiration. However, the automatic risk-limiting feature of the long call 
+may prove to be worth more than the decrease in profit potential. The strategist has 
+peace of mind in a rally and does not have to worry about unlimited losses accruing 
+to the upside. 
+Downside protection for a straddle writer can be achieved in a similar manner 
+by buying an out-of-the-money put at the outset. 
+Example: With XYZ at 45, one might write the January 45 straddle for 7 and buy a 
+January 40 put for I point if he is concerned about the stock dropping in price. 
+It should now be fairly easy to see that the straddle writer could limit risk in 
+either direction by initially buying both an out-of-the-money call and an out-of-the­
+money put at the same time that the straddle is written. The major benefit in doing 
+this is that risk is limited in either direction. Moreover, the margin requirements are 
+significantly reduced, since the whole position consists of a call spread and a put 
+spread. There are no longer any naked options. The detriment of buying protection 
+on both sides initially is that commission costs increase and the overall profit poten­
+tial of the straddle write is reduced, perhaps significantly, by the cost of two long 
+options. Therefore, one must evaluate whether the cost of the protection is too large 
+in comparison to what is received for the straddle write. This completely protected 
+strategy can be very attractive when available, and it is described again in Chapter 23, 
+Spreads Combining Calls and Puts. 
+In summary, any strategy in which the straddle writer also decides to buy pro­
+tection presents both advantages and disadvantages. Obviously, the risk-limiting fea­
+ture of the purchased options is an advantage. However, the seller of options does not 
+like to purchase pure time value premium as protection at any time. He would gen­
+erally prefer to buy intrinsic value. The reader will note that, in each of the protec­
+tive buying strategies discussed above, the purchased option has a large amount of 
+time value premium left in it. Therefore, the writer must often try to strike a delicate 
+balance between trying to limit his risk on one hand and trying to hold down the 
+expenses of buying long options on the other hand. In the final analysis, however, the 
+risk must be limited regardless of the cost.